AOFM support of ING raises eyebrows

The strong flow of mortgage-backed bond issuance from all but the big four banks has delivered its latest deal, a debut issue by ING Bank that puts this year’s total issuance at $13.7 billion, up 46 per cent from last year.

ING is expected to price its RMBS program, IDOL 2010-1, by the end of this week. The deal has four tranches for a total issue of $500 million. The securities are backed by loans originated by ING Bank Australia and insured by Genworth Financial Mortgage Insurance.

Macquarie Bank and Westpac Institutional Bank are joint lead managers of the deal.

Pricing guidance for $300 million of the highest ranking AAA-rated A1 tranche is about 100 basis points over the bank bill swap rate. The tranche has an average life of 1.7 years.

The $165 million A2 tranche has an average life of seven years and pricing guidance is for a margin of 110 basis points over the bank bill rate

The lowest ranking AB and B tranches are rated AAA and AA- respectively by Standard & Poor’s, and pricing guidance is not available. Both have average lives of 6.25 years.

The Australian Office of Financial Management will buy the B tranche – the longest-dated piece of the deal. This year, the AOFM has spent $11.3 billion buying into 17 issues, as it continues to support the smaller home lenders, which now seem to exclude only the big four banks.

But the AOFM’s support for the inaugural issue by the fifth largest retail bank raised some eyebrows among credit analysts.

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“It is a potential grey area as to whether the AOFM should be supporting this deal," Westpac director of asset-backed securities strategy David Goodman wrote in a note to clients.

Mr Goodman wrote that the AOFM had included a requirement in its assessment criteria to cover the “extent to which the mortgage originators associated with the proposed issue have relied on RMBS to finance their lending for residential housing in the past".

However Mr Goodman stressed that the government’s mandate to promote competition in the household lending market would have been assessed in the context of the strong industry position of the big four banks, which hold a combined 87 per cent of the stock of household lending.

“We can only then conclude that this competition aspect outweighed their assessment factor regarding prior RMBS reliance," he said.